Historical Portfolio Example: Not Necessarily Downside Protection A major reason that portfolios can effectively reduce risk is that combining securities whose returns do not move together provides diversification. Portfolios: Modern Portfolio Theory
Historical Example of Portfolio Diversification: Avoiding Disaster Portfolio diversification helps investors avoid disastrous investment outcomes. This benefit is most convincingly illustrated by examining what may happen when individuals have not diversified. Portfolios: Reduce Risk
Capital Allocation Line and Optimal Risky Portfolio The Two-Fund Separation Theorem
Investment Opportunity Set Addition of Asset Classes Minimum-Variance Portfolios Minimum-Variance Frontier Global Minimum-Variance Portfolio Efficient Frontier of Risky Assets
Correlation and Risk Diversification Historical Risk and Correlation Avenues for Diversification
Importance of Correlation in a Portfolio of Many Assets
Portfolio of Two Risky Assets Portfolio Return Portfolio Risk
Indifference Curves An indifference curve plots the combinations of risk–return pairs that an investor would accept to maintain a given level of utility (i.e., the investor is indifferent about the combinations on any one curve because they would provide the same level of overall utility). Indifference curves are thus defined in terms of a trade-off between expected…
